Stop losses for the Individual Investor
Although I've been known for some smart-ass replies I do value the opinions given to some of my questions.
Even though some of you are adverse to using stop losses I still use them. I've been toying with the proper stop loss for years and really can't decide. I know it must be close enough to save you from adverse market actions but not so close that you get whip-sawed from normal maket volitility. How close is too close and how far away isn't too far?
I've settled on 2 different ways to set my stop losses and can't really decide so I ask for your guidance. Here are my two methods and I'd like to hear your pros and cons.
1 - A SET % - Say 10% -15% below the stock's high. I'd use this as a trailing stop loss only moving the stop loss up when the stock price warrants it. The overall strategy is to at least get out 85%-90% of the that stock's market peak.
2 - Using a MOVING AVERAGE , maybe the 50 or 100 day moving average. Most TAs believe that stocks tend to have support and resistance levels. When they hit these on both the top and bottom they tend to test those levels for a period of time and either make a major break through or give up and retreat. As these stocks test those levels the moving averages tend to get tighter and tighter. Can they get too tight using this method?
What are your thoughts??
Comments: View Comments | Saturday May 17, 2008
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Archive Comments (1)
I buy I use limit orders to buy at what I think is a "good price". In my taxable accounts I only buy "core holdings", something I'm going to keep for the long term. In my tax-exempt accounts I put on a trailing stop loss of 20% immediately after purchase. If it sells, it sells. Too bad. Over time, I sell some of the gains if a particular purchase puts an entire asset category over plan by more than 10%. I also gain the trailing stop loss from 20% to 10% if I think the purchase or its industry is getting over-bought. Again, if it sells, it sells. Too bad. I don't miss it or regret the sale. I look for something in an asset category that's low according to my system, set a limit buy order at what I think is a bargain price and just wait for it to trigger. If it doesn't, oh well. This approach guarantees that I buy low and sell high, and it has worked very well for me in real life.
Posted by Eileen Teska July 8, 2008 12:17 PM